5 Common Payroll Errors and How to Avoid Them

Paying employees is a necessary part of doing business. On the surface, this seems like the least complicated workflow your company needs to manage. The truth is, there are a number of common payroll mistakes that companies make — and many of these can be extremely costly. Not only do you run the risk of an audit, but you can damage your relationship with employees and cause a major headache in pinpointing and fixing the issue that caused the error in the first place.

To avoid payroll errors, you need to know what they are and how to identify them. You also need an excellent payroll software solution in place to help streamline your process.

What Are the Most Common Payroll Errors?

Any area of payroll reporting, data, and management is susceptible to error when you think about it. It really comes down to the accuracy of your information. If you accidentally mistyped something in the payroll, it's going to be wrong. The wrong number of hours will mean that everything on that payment cycle will be inaccurate.

You also need to be concerned with the overall information that's included in your payroll software on any set employee. This might include their tax filing status, number of dependents, and their salary/wages. Any miscalculation will cause payroll errors in every cycle until it's corrected.

Your payroll solution should have features to help you avoid payroll mistakes. Here are some of the most common payroll errors that companies make.

Incorrect Tax Forms

Your employee uses their W-2 and any other company-issued tax form to pay their income taxes. Any mistake here will cause problems for the company and the employee.

Misclassification of Employees

The classification of employees is a legal matter, not a company choice. Classifying an employee as an independent contractor will result in a significant problem because the company will need to pay fines and taxes, as well as interest. You may have independent contractors working for your company, as well as permanent employees. Make sure they are classified correctly in payroll.

Not Updating Tax Rates

Tax rates are subject to change, and it's the company's responsibility to stay informed and make those changes in payroll.

Not Tracking Employee Hours Correctly

If there are mistakes in the number of hours the employee worked, the pay will be off. It's important to have solutions in place that make it easier for employees and managers to have accurate records of employee hours.

Errors in Calculating Overtime

Overtime can be a difficult thing to calculate because it may differ per employee. Salaried employees do not receive overtime, but companies need to be careful in classifying these employees. Nonexempt employees are entitled to overtime when they work more than 40 hours a week.

What Are the Consequences of Payroll Errors?

Payroll mistakes can be costly, both from a monetary and employee experience perspective. Consider the following consequences of payroll errors:

• HR professionals spend time correcting common payroll errors, which costs your organization money for unnecessary labor hours
• HR professionals tied up fixing payroll issues are unable to focus on other priorities, like moving the organization mission forward
• Your organization can incur penalties for delayed payroll tax reporting
• Consistent payroll errors can erode trust with your employees
• Employees may struggle to pay their personal bills on time, incurring additional fees and penalties
• Employees may even seek employment somewhere else due to payroll issues

Paylocity’s payroll software can address the consequences of payroll errors. Through streamlining the payroll process via automation, Paylocity eliminates the need for signatures, spreadsheets, and calculators. With the option to offer On Demand Payment to employees, you can ease any stress they have about paying their bills on time while keeping your cash flow intact. And as a registered reporting agent for the IRS, Paylocity can prepare and file your tax forms, ensuring your organization stays compliant.

What Is a Payroll Discrepancy?

A payroll discrepancy is any difference between what should be calculated and what is included on the employee's paycheck. This might mean that hours are missing, so the employee worked more hours than the payroll has accounted for. A payroll discrepancy can also mean an overpayment, which can be extremely costly for the company — especially if it's a processing error that caused all wages to be overpaid.

There are several different payroll discrepancies that can occur. Taxes might be improperly assessed, overtime might not be included, or overtime hours might be miscalculated. Any payroll error has some repercussions, and it's important that they are identified and fixed as soon as possible. You also can't depend on the employee to bring an error to your attention. They may not identify the error. If its root cause is in the way you're processing payroll, the error will likely be repeated every pay cycle until it's caught and remedied.

What is a Payroll Correction?

In the case of a payroll error, a correction must be made to ensure the accuracy of your payroll reporting. Circumstances under which you may need to make a payroll correction include over or underpaying an employee, incorrect withholding of taxes, or incorrect benefits deductions. A payroll correction can occur outside the current payroll run, and it’s important that you check your state laws to ensure how quickly you need to send payment to fix a payroll mistake.

How to Fix Payroll Errors

If you identify a payroll error that needs to be corrected, you can follow the steps outlined below to ensure your payroll gets back on track:

1. Cancel the payroll, amend the error, and reprocess it for the affected employee or employees.
2. Notify all relevant parties, which may include government agencies depending on the nature of the error. Send a payroll processing error letter to affected employees for their own records.
3. Be transparent about the nature of the error and what your department is doing to make it right.
4. Run reports to keep track of the amendment and keep a record of the payroll error.
5. Identify the source of the error and devise a solution for preventing it from happening again.
6. Empower employees to verify their information, including clock in and clock out records plus payment records.

When your payroll software has digital capabilities, your chance of incurring payroll errors is greatly reduced and if they do occur, fixing the error is significantly easier. With Paylocity’s solution, all of the above steps can be performed in one system.   

How Long Does a Company Have to Correct a Payroll Mistake?

The answer to this question depends on the state your company is in and the laws of that state. Overall, though, it's important to fix payroll mistakes as soon as you become aware of them. The longer it takes to fix a payroll error, the more likely you're compounding the problem. If the error is caused by faulty information in your payroll software, that error needs to be fixed before the mistake can be rectified.

In most cases, there will be a statute of limitations on the amount of time an employee has to collect payment owed to them. This time period may differ from state to state, but the most common is two years. For your company, it's important that your payroll accounting is audited internally on a scheduled basis to avoid these payroll errors and identify them to remedy them quickly.

Writing a Payroll Discrepancy Letter

Miscalculated payroll can impact your relationship with your employees. The best way to handle this is by being as forthright as possible and correcting the error. Your employee needs that information in writing. The employee payroll error or discrepancy letter should be kept in the employee file and in your internal records, as well.

The letter should explain the payroll issue, show how it was remedied, and explain what caused the initial error in the first place. This level of transparency helps the employee understand the issue and brings clarity to your own records.

How to Avoid Payroll Issues in the Future

The best way to avoid payroll issues in the future is to be proactive about finding a user-friendly payroll solution that keeps you accurate and compliant. Look for payroll software that allows you to:

• Track time and attendance
• Handle expense management
• Accurately prepare and file taxes
• An intuitive dashboard with easy-to-use features
• Access to all the information you need to run robust reporting while maintaining your payroll obligations at all times

Avoiding payroll mistakes in the future is as simple as finding a solution with capabilities that reflect the needs of HR professionals and enhance the employee experience through automation, accessibility, and customization.

How Paylocity's Payroll Software Can Identify and Prevent Payroll Errors

With Paylocity’s payroll software integrated into your organization’s payroll process, you gain the ability to both identify and prevent payroll errors. Here’s how it works.

• Stay agile with easily modifiable check types
• Void a check and create a new manual check two steps
• Create payroll reminders to never miss important dates
• Adjust check dates in your payroll calendar to meet your evolving needs
• Use Expense Management to automate tracking and reimbursement
• Leverage mobile capabilities to improve accessibility for employees
• Real-time net pay calculations keep you accurate
• Opt in for Wage Garnishment Services to simplify a complicated process
• Streamline payments with automatic approvals and deductions
• Track, map, and export your payroll data seamlessly

With one-click capabilities, automation of manual processes, and greater access for employees, payroll management becomes an extension of your employee engagement strategy all while ensuring your payroll is accurate and compliant.

Paylocity's payroll software is perfect for businesses that need a full solution for the modern workforce. Stay on track with new changes to laws, taxes, and your current employee classifications. Never miss a beat with an easy-to-follow workflow. Schedule a payroll software demo today!